Does A Long-Term and Active Customer of A Current Savings Account Have A High Lifetime Value?

Article excerpt

ABSTRACT

A basic tenet of relationship marketing is that firms benefit more from maintaining long-term customers; however, it is not clear whether the need for maintaining personal banking services of long-term and active customers (e.g., current savings accounts) is in the best interest of bank profitability (Reinartz and Kumar, 2000). The primary objective of this study is to provide a rigorous and differentiated empirical analysis of the lifetime and active-profitability relationship in a non-contractual service context.

In this study, the authors find that, in personal bank service scenarios, the most valuable customers are those who are less active and have high account balances. Moreover, the correlation between customer activity, lifetime length, and profitability is not significantly positive; long customer lifetimes do not necessarily increase revenue or decrease the cost of customer service.

Furthermore, a large number of transactions do not necessarily indicate a high lifetime value, and not all active customers contribute to large bank profits. The authors develop plausible explanations for findings that go against available evidence in the literature, which can help managers focus their efforts on more profitable customers. The authors also draw several marketing implications and acknowledge the limitations of this study.

Keywords: CLV, RFM, NBD, Gamma-Gamma, Exponential Smoothing

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

A core belief that underlies customer relationship management is that marketing activities should focus on increasing customer lifetime value (CLV). To achieve an increase in CLV the company must create customer segments, and assign customer segment managers who can further develop customer-focused programs based on these beliefs. However, most corporations are not organized in this way, rather their compensation systems work to frustrate customer relationship building activities.

The move toward a customer-centric approach to marketing, coupled with the increasing availability of customer transaction data (enterprise level data warehouse), has led to an interest in both the notion and calculation of CLV (Fader, Hardie, and Lee, 2005). Further, this concept has rapidly gained acceptance as a metric in customer relationship management (CRM), which relates to acquiring, growing, and retaining the "right" customers (Gupta, Lehmann, and Stuart, 2004) and evaluate marketing decisions, strategies, and resource allocation efforts (Blattberg and Deighton, 1996; Rust, Lemon, and Zeithaml, 2004; Venkatesan and Kumar, 2004). However, it is still a relatively new concept in the service context, especially in retail banking.

Therefore, we attempt to combine the contributions of the literature about CLV with actual practice as applying to current savings account customers in retail banking and we offer a method to calculate the CLV. Specifically, three reasons encourage us to begin with the customers of current saving accounts:

First, in retail banking, there are almost 98-99% customers with current savings accounts, which are the basis for other products or services; therefore, this is a very important component of business in retail banking. The second reason is that there are two types of context when we calculate CLV, non-contractual and contractual (Reinartz and Kumar, 2000; Reinartz and Kumar, 2003). There are also two types of customers in banks: retail and commercial. For current retail savings accounts, the relationship between the customer and the bank is in a non-contractual scenario. In other words, the relationship is between a seller and buyer and is not governed by a contract or membership; after the initial set up, we can conduct research on the basis of conventional wisdom and prior literature in this context (Schmittlein, Morrison, and Colombo, 1987; Schmittlein and Peterson, 1994; Colombo and Jiang, 1999; Fader, Hardie, and Lee, 2005). …